This disclosure relates to the field of online gambling and electronic gambling systems. More particularly, this disclosure relates to methods and systems for online and electronic gambling using theories of behavioral economics to incentivize users to invest part or all of their moneys in an investment account during the gambling session.
Online Gambling
Online gambling websites began to appear on the Internet shortly after the Internet began to develop as a means for consumer commerce in the 1990s. With the advent of smartphones in the 2000s, the term “online gambling” now includes electronic versions of games such as sports wagering, casino games, and poker that may be played and accessed using various wired and mobile computer systems, smartphones and tablet computers. For the purposes of this disclosure, “online gambling” shall mean any type of electronic gambling game available for play through an electronic communications network regardless if the end-consumer computing client uses a personal computer, smartphone, other mobile communications device or a tablet computer.
Although online gambling is legal in some nations, such as the United Kingdom and Australia, it is still of uncertain legality in the United States. The U.S. Department of Justice considers online gambling to be a violation of the U.S. Interstate Wire Act of 1961, which prohibits using a “wire communication facility” for the transmission in interstate commerce of bets or wagers. In recent years, the U.S. Fifth Circuit Court of Appeals interpreted the meaning of the Interstate Wire Act to prohibit sports-related wagers, but upheld a lower court ruling that the statute did not prohibit Internet gambling on “games of chance.” Thus, the status of online gambling is still undetermined in the United States.
Operators of online casinos face certain current and future challenges. The online gambling marketplace, as seen from the experience in the United Kingdom and Australia, is extremely competitive and gambling sites are characterized by low profit margins due to percentage payouts that are higher than traditional casinos. The academic literature suggests that between 88% and 98.7% of the money wagered in online gambling goes back to the player as winnings (the “payout percentage”); this payout percentage is higher than typical Las Vegas type casinos, which have payout percentages on the order of 80-90%. Online casinos have found that they need to payout more to players to attract and retain them because online gamblers show little brand loyalty. Moreover, in order to attract users, online gambling operators spend large amounts on marketing and also offer “signup bonuses” to new players (where such bonuses do require a minimum amount of wagering before they may be cashed out).
Online gamblers do, however, place a high value on the “trustworthiness” and general reputation of online gambling sites. Gaming sites that are rated highly on these parameters do display a higher degree of brand loyalty. Online gamblers also appear to have a jaundiced view of online gambling sites. For example, the American Gaming Association surveyed online gamblers and discovered that many gamblers felt that casinos cheated players and believed that other players cheated while engaged in online gambling. Other surveys confirm these results and also indicate that players are concerned that online casinos could go out of business and fail to return deposited funds to the players. As seen from this discussion, any differentiating characteristic for an online casino will be extremely valuable since this can be used to increase brand loyalty and customer retention among fickle online gamblers.
A problem with gambling, whether online, in traditional casinos or using state-sanctioned lotteries, is that persons least able to afford spending money on games of chance are often the very people who gamble with a disproportionate amount of their incomes. The quarterly National Affairs cited a 2008 study by the Institute for American Values, which found that U.S. households with incomes below $12,400 spent approximately $645 per annum on lottery tickets. If that same $645 had instead been invested in publicly traded equities for a forty-year period, the investment's value would have grown to $87,000. The study concluded that even though low-income households had the economic means to invest and save, such households instead spent the money on gambling-type activities.
To further reduce the societal effects of gambling, development of systems to “safeguard” problem gamblers during online gambling sessions have become an industry priority. One industry adoption is the provision of means for gamblers to make voluntary, affirmative steps in order to “control” their gambling. This “self-exclusion” required by the player can be performed by self-imposed gambling limits and other options made available to the player. As the online gambling industry grows, such “socially responsible gambling” initiatives will provide other ways for online casinos to differentiate themselves from the competition and to achieve brand loyalty and a positive brand image.
Behavioral Economics
The field of behavioral economics first developed in the late 20th century when economist Richard Thaler and cognitive psychologists Amos Tversky and Daniel Kahneman began to apply psychological decision-making models to classical economic theory. Much of the academic research in the field is focused on how “real-world” economic behaviors differs from the “rational economic actor” model used in classical economic theory and attempts to use findings in human psychological behavior as a “bridge” to explain these discrepancies.
The work of Tversky and Kahneman identified the concept of “loss aversion” in behavioral economics, which is a concept that indicates that people much prefer avoiding losses to acquiring gains. Evidence suggests that losses can be far more powerful on the human psyche than a gain of equivalent “magnitude” (i.e., the emotional loss of $100 will be felt far more strongly than the emotional happiness of a $100 gain). Another possible manifestation of the loss aversion concept is the human predilection to focus on sunk costs—namely, those costs that have already been incurred by a firm or person and which cannot be recovered.
In traditional economic theory, a rational economic actor should disregard sunk costs and instead base an investment decision only on prospective, or future, costs. The loss aversion concept may explain “real world” behavior in which sunk costs do influence the behavior of firms and persons, indicating that such persons and firms do not follow the supposedly normative behavior of a rational economic actor. One such example is the “disposition effect,” which is a tendency for investors to “hang on” to their losing investments while selling their winning investments. Experimental evidence indicates that, when faced with equal chances of winning and losing amounts, a person would need to gain approximately twice as much as the possible loss in order to be induced into accepting the wager.
The notion of loss aversion is explained by Tversky and Kahneman's “prospect theory,” a theory in behavioral economics that seeks to describe how people behave when faced with probabilistic alternatives involving “sure” gains and “probabilistic” gains. The theory identifies “risk aversion,” which is the tendency of a person, when confronted with two optional payoffs, to choose the potential payoff that may have a lower, but more certain, payoff value. For example, an investor faced with choosing an investment earning a risk-free rate of 3% may choose that investment over an equity investment that may promise a long-term rate of return of 10% but which will cause the investor to incur a risk of losing value on the investment during certain periods. Even when accounting for the investor's suggested tolerance for risk, such as the investor's age and assets, evidence indicates that many investors are risk averse when compared to the predicted normative behavior of a rational economic actor. Risk aversion is related to the human emotion of regret; a person may behave this way as a way to avoid regret, including paying an opportunity cost of not choosing the “better” probabilistic outcome. Generally, prospect theory states that, in a situation where both outcomes are “good,” decision makers tend to prefer a sure thing over a gamble (exhibiting risk averse behavior), but that, in a situation where both outcomes are “bad,” decision makers tend to reject a sure thing and accept a gamble (exhibiting risk-seeking behavior).
Tversky and Kahneman also determined that there is a “priming effect” that affects a person's economic decision-making. The priming effect is a memory effect in which a person's exposure to a stimulus, such as an image, influences the person's response, including emotional responses, to a later stimulus. A person's physical behavior and actions can even be primed to change through the ideomotor effect. In essence, due to the priming effect, a person's behavior and responses can be affected by presenting certain images or words to the person prior to the point when the person would have to perform the response.
Another element of behavioral economics that is relevant to this disclosure and that will be discussed is the “framing effect.” The framing effect is seen where persons react differently to a particular choice—even a choice in which the two offered options are equivalent—depending upon whether the choices appear to be losses or gains. In the framing effect, persons generally choose the more “positive” frame of a choice rather than the “negative” frame of the same choice. Tversky and Kahneman have also published work indicating the existence of the framing effect.